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Be Prepared! What if Things Go Right?

Before I start this evening, the Aleph Blog Lunch scheduled for 12/29 will start at Noon, not 1PM.


Though the US equity market seems short-term overbought, I want to poke at an area of the investment space that is more bearish than me.  Though I admit there are many problems in the world today, investment is still a question of buying assets that will deliver the greatest amount of purchasing power over time.

And though I don’t think the equity premium is high on average, I certainly prefer stocks to bonds here.  Cash is another matter — I could see both stocks and bonds decline over the next year, though that is not my default scenario.  Commodities are tougher, and I don’t have a strong opinion.

But I could be wrong in a wide number of ways.  If one looked at my personal asset allocation, it would look something like this:

  • House 15%
  • Private equity/debt 12% (I’m an angel on the side?  Well, sort of.  I help close friends.  The debt was in my opinion junk grade, and now investment grade.)
  • Cash 10%
  • TIPS 3%
  • Public equities 60%

That doesn’t look so bearish.  Part of my operating philosophy is that over time, things do tend to go right, but not all of the time.  Great Depressions are normal events, not abnormal events.  They occur because we have a debt-fueled expansion in some major asset that is a temporarily virtuous cycle, until players begin relying on capital gains to keep their position financed.  That doesn’t happen, and the asset bubble begins to unwind leading to debt problems.

At present, we are part way through the debt crisis.  The banks aren’t in great shape yet; I still think that their assets may be overstated on their balance sheets.  It remains to be seen whether the banking crisis will turn into  a sovereign crisis.  In the Eurozone, it may be worse.  The mechanisms they are trying to set up are trying to defuse the risks of Eur0fringe credits to Eurocore banks.  Cheaper for Eurocore governments to discourage lending to the Eurofringe, much as that cuts against the concept of a common market.

The debt crisis is not over; it is morphing into a sovereign crisis, aid by the growing unfunded liabilities from government pensions and healthcare.


At present I see professionals bullish on stocks, and bearish on bonds.  They are expecting that GDP growth will pick up, and inflation be moderate.

I think stagflation is a real possibility, with inflation and unemployment rising. That would be bearish for bonds, and less so for stocks.

But back to my original point. I don’t have simply one estimate of where things are going, I have many estimates, and it is quite possible that things go right.  Governments and policy makers have an interest in making sure things go right, so it is not airy fairy to presume that the present condition will continue, even if real growth slows.

A great trouble with a dynamic economy is that it is not possible to compare eras, because the underlying structures of each era changes.

And so at present I muddle in the middle, investing on the low side of bullishness.

Asset Allocation, Bonds, Macroeconomics, Portfolio Management, Stocks | RSS 2.0 |

5 Responses to Be Prepared! What if Things Go Right?

  1. [...] – Investing on the ‘low side of bullishness‘. [...]

  2. [...] This post was mentioned on Twitter by Brian Shannon and Rahul Deodhar. Rahul Deodhar said: Be Prepared! What if Things Go Right? [...]

  3. libai says:

    Hi David,

    Thank you for sharing your personal asset allocation. I too have a private equity position. Sadly, mine is still junk. But I learned a lesson: if you loan money to a friend, get the details in writing and get some collateral to back up the loan. Otherwise you should call it a gift.

    What asset allocation would you recommend for someone who is about to retire?



  4. [...] * David Merkel: Investing on the low side of bullishness [...]


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.

Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions.

Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.

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